My opinions on value investing. The idea is to create a value discussion on stocks and concepts. You might find this blog leaning a bit towards Dalal Street but the concepts should travel well across global markets.
Please note that I may or may not have a position in these stocks. Please use these opinions after through independent research and at your own risk.

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Friday, March 13, 2015

How to get started with Value investing

Many times I am asked: This is all very
good but how can it benefit me? And I was planning to cover this in a short few
articles but I was chatting with a friend of mine who said

“All this motherhood
stuff is great but I will only read your stuff if it can benefit me!”

And this
is coming from a guy who has lots of experience in various business fields in
various countries for decades. He has probably read more business books than I
have seen in libraries and bookstores. This probably means what he is saying
might actually have a tiny bit of weight to say the least. You can thank him
(or not if you don’t like this section) for this factor being covered over
several articles.

First up the question you need to ask
yourself is whether you want to execute the strategy yourself or find a
manager. The thing is that value investing can be a part time or full time job.
Depending on your diligence and discipline the results can vary. If you can
spend a few hours every day religiously to the task there is nothing like doing
this yourself. Several people who have gotten good at it do this as a
profession now. Besides I find it fun and some even tell me that it’s akin to a
gambling addiction.

Gambling is defined on Wikipedia as:

“Gambling is the wagering of money or something of
material value on an event with an uncertain outcome with the primary intent of
winning additional money and/or material goods. Gambling thus requires three
elements be present: consideration, chance and prize. The outcome of the wager
is often immediate, such as a single roll of dice or a spin of a roulette
wheel, but longer time frames are also common ...”

All three elements of gambling are present
in value investing – consideration, chance and prize. The thing is that the
long term element takes a bit of the element of gambling out of the value
investing theory. My rule of not selling out until minimum one year (but try
for at least two years) drives this point home. But other than the term of the
investment it is very hard to argue that value investing or for that matter any
kind of investing as a hobby or a profession is not very different from a
gambling addiction. Self proclaimed arbitrageurs will tell you that they are
not gamblers as they probability of success is a 100%. The set of situations
with a probability of 100% is small and is mutually exclusive from the set of
situations found in the investment world. Yes one can get very close to the
100% situation but never have I come across a 100% probability arbitrage trade.

If you are not interested in doing this
yourself – don’t think you read this book for nothing. Knowing these principles
will enable you to select a good manager. One could make a checklist that
outlines the principles in this book but like most things about value investing
these principles are not hard and fast. The attributes of a good investment
manager are no different from those of a good manager of anything. The main
attributes are honesty, diligence, ability to identify mistakes & correction and
sticking to the plan.

In the few next articles I will outline a
simple few steps that will cover the steps to becoming a good value investor.
This by no means is the only way to becoming a good value investor. It is just
a rationalization of what I have seen others do and what I have experienced
myself. If you have a better course I would love to hear about it (and amend my
article alongside).